The Enforcement Section of the Massachusetts Securities Division charged a former Next Financial Group representative with violating state securities laws, claiming he repeatedly sold real estate investment trusts and variable annuities to clients “without regard to the suitability of the investment.”
In an administrative complaint filed Thursday in Boston, the Massachusetts Securities Division alleged Charles C. Kulch also failed to “properly calculate client liquid net worth” and allowed purchases of REITs “in excess of stated limits.”
Kulch is “no longer with the firm,” a Next Financial spokesperson told ThinkAdvisor Monday. “Additionally, we have made significant investments in our compliance controls and continue to focus on elevating our compliance practices across the organization,” he said.
Kulch “used dishonest sales practices to sell non-traded REITs and other risky alternative investments to customers for whom they were unsuitable, in violation of his own employer’s stated policies,” Secretary of State William F. Galvin, the state’s top securities regulator, said Monday in announcing the complaint.
“While NEXT put policies in place to protect investors from schemes like Kulch’s, Kulch took steps to manipulate the calculation of key figures NEXT monitored, circumventing such policies, and rendering them meaningless,” according to the complaint.
In the process, Kulch generated almost $1 million in commissions from the sale of REITs and variable annuities in a five-year period, the complaint alleged.
In that same five-year period, Kulch sold nontraded REITs to more than 100 Massachusetts investors, including almost 50 transactions that allegedly openly violated Next Financial’s own policies pertaining to overconcentration and prohibiting the sale of nontraded REITs to customers over 80, according to the complaint.
As an example, the complaint noted that in the case of an investor from Attleboro, Massachusetts, Kulch “executed three simultaneous non-traded REIT transactions on the same day the customer opened his NEXT account.”
Kulch listed the percentage of that client’s liquid net worth as 5.4% for each transaction, which “clearly exceeds the 5% limit set by” Next Financial, according to the complaint.
Although the firm required Kulch to provide a detailed explanation as to why any amount more than 5% was appropriate, “Kulch lazily provided four words: ‘future retirement income stream,’” the complaint claimed, noting that explanation “does not form a complete sentence; much less provide a detailed explanation as to how over-concentrating an individual in illiquid products is appropriate.”
With the complaint, the Securities Division is seeking an order requiring Kulch to provide restitution to investors. The division is also seeking an administrative fine and an order to have Kulch permanently barred from acting as an RIA representative.
Kulch is not currently registered as a broker or RIA, according to the Financial Industry Regulatory Authority’s BrokerCheck website. In a disclosure on his profile, the Massachusetts Securities Division said that “when filing disclosure forms required by his firm, Kulch filed multiple forms simultaneously, and failed to account for the effect of each transaction on subsequent forms.”
The former broker was registered with Next Financial from Dec. 18, 2006 until June 24, 2020, according to an SEC Investment Adviser Public Disclosure report. Neither it nor BrokerCheck cited the reason why he left the firm. He did not join another FINRA-registered firm after leaving Next Financial, according to BrokerCheck.
He is apparently still serving as division manager of Kulch Financial Services in Nashua, New Hampshire, according to its website. That firm did not immediately respond to a request for comment.
Massachusetts securities regulators previously fined Next Financial $150,000 over unsuitable sales of nontraded real estate investment trusts to elder investors and related supervisory failures. In addition to the fine, a consent order required the Houston-based independent broker-dealer to offer restitution to the Massachusetts residents who were sold unsuitable investments.
The Massachusetts Securities Division opened an investigation after receiving a complaint in July 2017 from a retired veteran who had been sold annuities and nontraded REITs, despite his expressed desire for “conservative investments.”
— Check out Massachusetts Finalizes Fiduciary Rule; Consumer Group ‘Disappointed’ With Changes on ThinkAdvisor.